Report: Globalizing G&A Delivers Massive Savings

With an eye on the slowing economy, The Hackett Group earlier this year listed what it regards as the 10 most promising opportunities for general and administrative (G&A) savings, as we reported here. Now the global strategic advisory firm has extended its research to pin down the cost savings that companies can realize by globalizing their G&A functions, either through a captive offshore operation or a business process outsourcing (BPO) service provider.

The results are eye-opening. Just under three-quarters of the companies in Hackett's sample saved between 11 percent and 50 percent of their baseline cost. Among companies that use a BPO provider, 63 percent achieved savings at the higher end of that range (26 percent to 50 percent), as did 36 percent of organizations with captives.

A typical Global 1000 company could realize $97 million in savings by taking a straightforward "lift and shift" approach to globalizing its G&A processes, and up to $200 million by combining that strategy with transformation efforts such as technology upgrades. "A lot of companies still haven't executed a basic lift-and-shift transactional play," says Michel Janssen, chief research officer with The Hackett Group. "There's an additional movement toward the layers above that, which bring in more skills-based conversations. That's starting to happen, but it's not in full swing yet."

It's not just the biggest organizations that reap the gains, the study notes. Thirty percent of companies that have globalized their G&A processes have revenue of less than $5 billion. Setting up a captive center probably isn't the best option for these organizations, though, according to Janssen. "If you're a $5 billion company, you're challenged as to scale; this is a 50-person opportunity, and it's hard to set up a whole new center for 50 people. You can do it, but you're working against the odds." But a BPO arrangement is a definite possibility.

While both the captive and BPO approaches can generate big returns, captives have the edge when it comes to innovation. Forty-six percent of companies with their own offshore center reported that the unit's performance in this area exceeded expectations, compared with 17 percent of those using a BPO. To some extent, that's just the nature of the BPO beast; it's much harder to press for process improvements, for example, when there's a contractual relationship in place, especially if the contract is based on head count. Companies should be paying close attention to their outsourcing contracts to ensure that vendors are incentivized for improvements, and working closely with them toward shared gains, but by and large that's not happening.

Companies venturing into G&A globalization should "understand the size of the prize," says Janssen. Are you shooting for the relatively restricted gains of a process hand-off, or the larger benefits of the full offshore-plus-transformation approach? Most companies will chart a course somewhere in the middle. "You're not just doing a lift, and you shouldn't be doing just transformation. You should be looking for what makes sense in your given situation."

The opportunity will be out there for some time to come. Hackett estimates that it may be another 10 to 20 years until wage rates in India are 70 percent of those in the United States, even under worst-case assumptions for offshore wage inflation. The firm expects the pace of offshoring to accelerate in the next three years, as companies that have already started globalizing their G&A processes move 50 percent more work offshore.